SYDNEY--Australia & New Zealand Banking Group Ltd. (ANZ.AU) on Thursday reported record full-year net profit on the back of cost-cutting and improving domestic and overseas performance, but warned of "challenging" times ahead.

Australia's third-largest lender by market value said earnings grew 6% to 5.7 billion Australian dollars (US$5.9 billion) in the year to Sep. 30, up from the A$5.36 billion reported for fiscal 2011.

Chief Executive Officer Mike Smith said the the bank's push into Asia was ramping up, with 21% of group revenue now coming from ANZ's overseas operations, excluding New Zealand. China, where ANZ has particularly been focussing its investment, is now the bank's third-largest market by revenue. Still he provided a downbeat forecast for a "challenging" year ahead and his emphasis on delivering "predictable" results--compared with the 11% rise in full-year profits delivered by Australia's largest bank by market value, Commonwealth Bank of Australia (CBA.AU) -- failed to impress investors.

Australia's economy is expected to expand by 2.7% in 2013 as weak consumer confidence continues to dampen growth, he forecast, adding that bad debt provisions are expected to rise during the year amid the softening economic outlook.

"2013 does look challenging with a softening economic outlook and headwinds in a number of areas," Mr. Smith told a conference call. "Growth is going to be weaker and conditions are likely to be volatile."

ANZ shares fell 1.3% to an intraday low of A$25.18, compared to a slightly positive broader market. At 0036 GMT, shares were down 0.7% at A$25.14.

Nomura analyst Victor German was sceptical of the result, putting much of the success down to the bank's decision to release A$230 million of collective provisions for the half, which he said was "surprising," given the deteriorating market conditions. Goldman Sachs' Ben Koo agreed, citing the reduction in provisions as the "main negative from the result" and noting with concern that "the commercial arrears trends in ANZ's result today confirms potential risks around provision sufficiency."

Underlying profit gained 6% to A$6 billion, just ahead of consensus analyst expectations, driven by steady gains in ANZ's domestic operations during the second half of the year and tight cost control in the domestic business.

Almost half of the bank's market revenue is now booked offshore, Chief Financial Officer Shayne Elliott told investors on a call. Global Markets revenue rose 14% to A$1.9 billion, with customer sales now representing 61% of total income.

Profits from ANZ's domestic operations, the mainstay of its business, rose 4% on the year to A$2.49 billion as the bank clawed back some market share from its rivals, driving a jump in retail profits in the second half of the year and offsetting a weak performance in its business banking division.

The New Zealand division posted another solid performance with profit up 11% cent to NZ$957 million ($786 million). The lender recently said it was moving to a single brand across New Zealand, combining its ANZ and The National Bank businesses, and cutting several hundred staff.

The bank's margins, however, continued to be eroded by strong competition for deposits and high wholesale funding costs. Its net interest margin fell 11 basis points during the year, even as the bank held back a portion of the several rate cuts from the central bank.

Mr. Smith told a conference call that the decision to release those provisions had "not been taken likely" and individual provision levels had been increased as a result. Provision levels have been a particularly hot topic for analysts, given the lower growth environment in Australia.

ANZ's costs, traditionally seen as a particular challenge for the bank, were a particular highlight. The group cost-to-income ratio declined 110 basis points to 45.1% in the second-half of the year as the bank downsized its workforce by more-than 2,000 people to 48,239.

Mr. Elliott said the bank's "headcount has now fallen for four consecutive quarters and we expect that trend to continue" as it targets a further 2% reduction in its cost-to-income ratio over the next two years.

The bank will pay a dividend of 79 cents per share in the second half, up 4% on year, taking the total dividend for the year to A$1.45 a share.

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